MinLaw to propose laws targeting debt consultancy firms exploiting debt repayment scheme

Laws around a scheme to help individuals avoid insolvency may be tightened, with the authorities targeting firms that encourage individuals to borrow money and file for bankruptcy to get a discount off their debts.

These consultancy firms are looking to abuse the Debt Repayment Scheme (DRS), a pre-bankruptcy scheme administered by the Ministry of Law (MinLaw).

On June 9, MinLaw said there has been an increasing number of debtors engaging the services of consultancy firms, which encourage debtors to self-petition for bankruptcy with the objective of being placed on the DRS.

“This is done not with the intention of being adjudged a bankrupt, but with the intention of abusing the DRS to obtain a discount off their debts,” the ministry said.

A debtor can avoid being made bankrupt if he is put on the DRS, but he must file for bankruptcy first before being considered for the scheme.

MinLaw said that the consultancy firms are charging debtors sizeable fees and encouraging them to borrow money from creditors to pay for their services.

“Due in part to this trend, there has been an increase in the number of debtor-initiated bankruptcy applications, where debtors borrow irresponsibly to pay for such consultancy firms’ services in helping them apply for bankruptcy,” MinLaw said.

The Straits Times reported in March that more than half of the bankruptcy applications in 2024 were made by the debtors themselves – the fifth consecutive year since 2020 that the number of self-filed applications was higher than applications by creditors.

MinLaw data showed that 2,928 bankruptcy applications were filed by debtors in 2024. That represents 59 per cent of all applications made that year.

The DRS is a voluntary, debtor-driven scheme intended to help wage-earning debtors with relatively small debts avoid bankruptcy while helping creditors receive higher repayments than they would otherwise receive in the event of insolvency. 

Under the DRS, debtors with unsecured debts not exceeding $150,000 can enter a debt repayment plan over a fixed period of not more than five years with their creditors and avoid bankruptcy.

When the debtor meets his financial obligations under the DRS, he will be released from his debts.

MinLaw said it noticed an increasing number of debtors engaging the services of consultancy firms that encourage debtors to self-petition for bankruptcy with the objective of being placed on the DRS.

To address the issue, the ministry is proposing a new law that will make it a crime for businesses to solicit and canvass any person to make a bankruptcy application.

Regulated professionals, in particular lawyers, accountants and financial advisers, as well as charitable entities that are institutions of a public character, will be exempted.

The offence will be punishable with a $10,000 fine or three years’ jail, or both.

The DRS was introduced in 2009 as people grappled with the 2008 financial crisis and the Great Recession, which caused many to lose their jobs and take pay cuts.

It began with a debt threshold of $100,000, but this was increased to the current $150,000 in 2020 following a review in 2016.

Under the scheme, debtors make repayments of their debt by following a structured repayment plan under the supervision of the Official Assignee (OA), an officer of the court appointed by the Law Minister.

MinLaw said that as part of a review of the scheme, it is also looking to add two new grounds of unsuitability for the DRS.

They include the failure to pay the preliminary fees and incurring of debts with no reasonable ground of expectation of being able to pay.

Debtors who are referred to the OA to be assessed for their suitability for the DRS are required to pay preliminary fees totalling $600.

In addition, MinLaw is also looking to add as a new ground of failure individuals who incur debts with no reasonable ground of expectation of being able to pay, and imposing a four-week time limit for creditors to file their proofs of debt under the DRS.

Members of the public are invited to provide their feedback on the proposed key amendments after viewing the full consultation paper at https://go.gov.sg/public-consult-drs

Those who wish to submit their views and feedback may do so by June 27 at https://go.gov.sg/drs-proposed-legis-consult

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

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